2005 AACE International Transactions

CSC.11
Effective Cost ManagementBack to Basics
Mr. Robert L. Tichacek, PE

fessionals we are obligated to manage all areas and indices of a

project's success. Yet the topic and content of this paper focuses
only upon cost. Why? This does not reflect a feeling on the
author's part that cost is in itself intrinsically more important or
valuable than say quality or time. It is because the author has
observed and experienced that cost as a measure and as an indicator is universally used, easily understood, requiring no specialized knowledge of any kind, and enables a simple common
denominator with which to normalize all comparisons. There are
Cost as the standard measure of project successhaving also unique attributes about cost as both a measure and a standard
higher visibility and requiring extremely effective methodolo- that are not shared by other measures. These unique qualities in
turn present special challenges in management methodologies.
gies for managing and communication;
Cost management vs. cost accountingrequiring different
methodologies and a higher level of involvement by the projCOST IS...
ect team;
Cost management as a process, not a discipline, requiring the
integration of effort and inputs from multiple persons using
The Most Common Measure of Success
prescribed methodologies;
All projects are measured against some performance criteria
Total cost as the most important concept to the organization;
Organizational goals for cost management are often in con- that indicate whether the project is successful or not. There are
many criteria, all important, that we regularly incorporate when
flict with project goals, yet must be aligned and addressed.
establishing performance metrics. Time, quality, safety and cost
are some of those. Cost however is the measure that is most often
This paper offers methodologies for:
presented and is widely understood as an indicator of how well a
An effective and thorough three-point cost management project is performing, is likely to have performed or has performed.
approach;
Even projects driven by other metrics will rationalize strate Managing total cost;
Satisfying organizational needs in addition to project needs. gic decisions on the normal basis of cost. For instance, a project
that is schedule driven is usually only this way because the payback or deliverable promised by the project exceeds the savings
that might be experienced by extending the execution time. Cost
COST MANAGEMENT, AN OVERVIEW
is an easily understood common denominator used to rationalize
Projects are described and defined by metrics and measures. a decision to, say, incur the additional costs of accelerating an
Quantitative comparisons signify distinctions between success existing schedule or to accept greater costs in developing a timeand failure, good vs. very good or suggest 'go' vs. 'no go' to us. We optimized baseline execution plan 1.
Finally, there are many project participantseither direct
not only measure outcomes, but we then compare them against
stakeholders or beneficiaries as well as others having oversight
norms established as thresholds of acceptability.
Projects are measured using many factors and compared roles at corporate, non-project levels who better relate to and more
against just as many standards. Safety time and schedule, quality easily understand cost as a measure and yardstick for performand User Satisfaction are important to projects and are thus meas- ance. Theirs is the world of return on investment, the bottom line,
ured and compared against either universal/external standards or or time to payback indices; the concepts of rarned value, SPI, or
project specific/internal standards. As project management pro- CPI are lost on them.
his paper addresses cost management and its primary
significance as a measure of project success. All projects are managed and measured by success criteria of
several types, cost being only one of many important
metricsbut cost as a resource and as a measure possesses unique
attributes which differentiate it from other project measures and
requires unique considerations and methodologies in order to provide for its effective management. This paper considers:

CSC.11.1

2005 AACE International Transactions

This paper does not suggest that cost is the more important Projects are insistent about and capable of seeing that there is
expenditure quid pro quothat monies are appropriately
metric, only that it is the easiest to comprehend and therefore the
spent and receive appropriate value in return.
most common and that the ability to frame any/all project performance measures within the context of cost should be well with- Projects have mechanisms to prevent overspendingnot only
relative to their budget, but also relative to their need. That is
in the capabilities of any project management or project controls
to say, funding that might possibly become excess through
professional.
value management, reductions in scope, unrealized risk, etc.
But beware! This can be a species argument and a misleading
will be identified and will returned to the organization at
justification for spending foolishly. All too often spending deciappropriate times.
sions are suggested and approved on the basis of buying time
when in fact an expedited delivery or accelerated task is not on the
critical path and has no discernible benefit to the project.
COST MANAGEMENT VS. COST ACCOUNTING
Remember that one of the four goals of cost management is to
spend wisely, i.e. to ensure that a unit or more of value is received
All organizations identify cost management as a goal and a
for every unit of investment.
practice. Managing cost however differs greatly from accounting
for them, and while many organizations feel that they are managing costs, they are in fact they are only accounting for them. Such
The Most Finite Resource
Projects are expected to complete within the confines and organizations are depriving themselves of the benefits that manlimitations of the resources allocated to them. A project that has agement processes deliver.
Simply stated, cost accounting addresses how much and
been approved on the basis of a budget estimate is expected to
what for. It is not analytical and merely address history or tells us
complete having spent no more than that amount.
If a project's time management has failed, i.e. too much work what happened. Cost management focuses upon measuring perremains at the completion of the schedule, then more time is formance, comparing against expectations and finding reasons for
needed to complete the project. While the need for more time divergence. Cost management also endeavors to predict final outmay not be acceptable, time is, as a commodity, available. Time comes and to provide strategic recommendations for changing or
itself is infinite. There are always more hours, days, weeks and mitigating such. Cost management is forward looking and
months that will occur post-deadline and does not require bor- attempts to answer why, what it means and what can be done
rowing, issuance of bonds or trading off between other initiatives. about it.
Cost management is not good to cost accounting's being bad
While time allotted runs out, time itself continues on and is available. The need for it may well reduce salaries, eliminate bonuses they are both different, perform different functions and are both
necessary. In fact, cost management cannot be performed without
or even ruin careers, but it is available.
Money is not infiniteor certainly not within the context of having an adequate cost accounting process in place.
The irony is that a larger, disproportionate share of the costs
the project or corporate organization. When allotted monies are
gone, you must obtain more if you wish to continue the project. incurred in employing a cost management methodology is in the
You must litterally beg, borrow or steal from other project funding budgeting, allocation, recording and reporting of coststhe
accounting side. Whereas employing the processes to effect a
opportunities or the project will be forced to a halt.
complete management capability requires little added cost.
The Most Competed for Resource
Corporations are forced to make choices when appropriating
funds for approved projects. To obtain approval, every project initiative that is presented must make a business case or demonstrate
a tangible benefit to the organization based upon the project's
deliverable. In the typical corporate scenario, there are many projects worthy of investment and approval, but with a finite availability of money, only selected ones can be funded within a given
planning and budgetary cycle.
Competition for project funding within an organization is
vigorous. In making these choices, management must rely upon
the accuracy and relevance of the information and data underlying the cost versus benefit statement. They also need to feel
assured that:

COST MANAGEMENT OBJECTIVES

There are four objectives in cost management:

Projects are not over-funded, denying funding for other projects thus depriving a benefit to the organization.
Projects are not under-funded, and inviting a cost-to-complete crisis at a later, more critical time.
CSC.11.2

Spending timelyEnsure that money or resources are

expended in accordance with the project or corporate capital
expenditure plan;
Spending wiselyEnsure that monies are well-spent, i.e. that
a planned unit of gain is achieved for each unit of expenditure;
Spending correctlyEnsure expenditures only for those
things for which we are obligated;
Spending perceptivelyEnsure that spending versus
achievement variances are identified, analyzed, corrected or
trended so that early warnings can enable timely actions.

2005 AACE International Transactions

Figure 1Spending Timely and Spending WellBoth Required.

management initiatives include facility operations and maintenance personnel as participants or only project personnel? Does
the project manager regard cost management as the team's
responsibility and ensure the integration of cost management
A Process Rather Than a Discipline
The function of cost management is often regarded as a dis- thinking and action into the ongoing project operations, or do
cipline or as a position within a project structure and assigned to they abrogate that responsibility to the cost engineer and limit
their involvement to being attendees only during monthly or quarindividuals rather than to teams.
Cost management requires processes and methodologies that terly cost review sessions?
can only function with information development and knowledge
hand-off and enhancements. This is made possible through the
deployment of assignment, collection, assessment, analysis,and Performed by people, not products
strategic decision making processes. Cost management is a man- There is no software or tool that manages cost. Tools can simplify
agement function and responsibility and must be performed by or facilitate the tasks of recording and reporting cost, but the
process of managing cost is dependent upon properly estimating,
teams using recordable and repeatable methodologies.
allocating, measuring and analyzing cost performance.
The integration of processes and knowledge from multiple Management requires that information be analyzed and acted
functional rolesEffective cost management requires involve- upon. Analysis of alternatives, what-if comparisons and recomment and interaction between many individuals at different levels mendations based upon strategic thinking can only be performed
having different roles and skills. It demands that all persons by project controls professionals!
employing management methodologies interact in a synergistic
fashion. Cost management practice areas are too often compartTOTAL MANAGEMENT
mentalized and singularly tasked, allowing only minimal inforTHINKING BEYOND THE PROJECT
mation exchange or knowledge enhancement between silos. In
your organization, is estimating performed as a stand-alone funcOrganizations initiate and provide funding for projects, and
tion, or is there participation with and knowledge integration with
those developing the execution plan and strategies? Do value organizations receive the benefits from completed projects.
EFFECTIVE COST MANAGEMENT IS

CSC.11.3

2005 AACE International Transactions

Figure 2Think Llife-Cycle, Think Total Cost and Think Benefits.

Project teams are formed to execute these initiatives, but others
within an organization have responsibilities for and are affected by
the operations and outcomes of the project team. While the both
organization and the project desire success, their goals and success measures can be different and often in conflict.
The Project team would consider opportunity for an early
completion good whereas the financial group might be concerned
that an early completion, even without added costs, would cause
a deficit in cash available to pay the contractor as the capital
spending plan is violated. Remember that most capital plans are
funded and financed by borrowings that occur within timeframes
set by the program or capital plan. To the comptroller, even under
spending is bad as it signals to them that funds were not really
needed and could have been available for other corporate initiatives. Likewise, a decision to delay a project, for reasons that were
prudent by project standards, might conflict with a larger need or
benefit to the operations group.
The project team manages project performance, while the
organization manages expenditure and project benefit. These
needs must be aligned and integrated, and managed considering
the bigger picture. This requires involvement of the executive
sponsor who is empowered and charged to make decisions based
upon organizational benefits.

TOTAL COSTTHINKING BEYOND THE PROJECT

execution metrics, cost, etc, it is easy for our involvement within

a project to obscure our view of a bigger corporate picture.
Irrespective of that, it is important to remember that the corporation has needs that must be served as well as the project.
Our roles as project management professionals often lead us
into conflict regarding the calculation and analysis of costs versus
benefits. Organizational expectations, project team versus corporate staff, or functional role constraints, owner's representative versus CM at risk, will have influence upon and will affect our viewpoint and decisions regarding appropriate actions in managing
project costs. The CM at risk or CM having shared participation
cost savings/cost overruns has every incentive to promote the
deferral of costs to cost centers beyond the capital centerrecommending, for example, lower-priced mechanical equipment
that might result in lower 1st costs but increase maintenance or
energy costs. Likewise, facilities personnel charged with successfully operating and maintaining the completed project will have a
similar bias toward obtaining the easiest and least costly operating
conditions, without consideration for inordinately high 1st costs
bearing little additional value.
Our responsibilities as project management professionals
require that we think beyond just the capital or any single expense
component. We need to consider the optimal balance between
first costs and life-cycle costs and to provide dispassionate, objective analysis to owners or investors with recommendations based
upon the best possible solutions. We are familiar with the pay me
now or pay me later conceptwe must realize the for the pay
me more/less now or pay me less/more later concept as well.

Project Success: Successful Execution vs. Successful Project

We must distinguish between a successfully executed project
THREE POINT COST MANAGEMENT APPROACH
and a project that is successful! Projects are not approved and
funded on the basis of their estimated costs and/or execution
plansthey are approved only because the value of their benefit(s) is greater than the sum of the costs. Likewise, project spon- The Cost at Completion Triangle
This graphic represents a fixed volume of cost, measured in
sors are measured by and rewarded based upon the successful
delivery of the promised benefits for which the project was initiat- money, resources or even time, that the project represents as sufed. Because the project team is gauged mostly by compliance with ficient for execution and to provide all project deliverables. As
CSC.11.4

2005 AACE International Transactions

Figure 3Manage the Points, Contain the Cost.

with any geometric shape, the volume can only remain constant
if the boundaries remain fixed.
The suggested approach is to consider and develop strategies
with which to manage each of the points of the triangle, and then
implement process that support those strategies.

Point 1: Ensure the Accuracy and Completeness of the Baseline

Estimate
Nothing is worse than managing to the wrong number!
Projects are threatened or have failed because of the inability to
meet expectations imposed by estimates that are incomplete, contain invalid assumptions, are erroneous or contain no provision
for surprises or unknowns. Mistakes can and do happen of course,
but unfortunately they are often discovered well past the point of
no return. At that point, there may be few with options for recovery short of assaults upon scope integrity and functionalityperhaps disguised as value management, or establishment of a contentious environment in which of all information, directives or
requests are interpreted as change, resulting in the seemingly endless war of claims.
The best way to solve a problem is to prevent itsimple
processes can and should be deployed during the development
phases of the estimate and continue through the delivery of the
completed definitive or baseline estimate. Some strategic processes include:

Thorough understanding of scope and project deliverables

are there clearly communicated criteria and expectations?
Other agendas?
BenchmarkingHow does project compare with similar
industry projects? With similar company projects?
Integration with project execution plandoes the estimate
incorporate time requirements and special execution strategies that might be decided upon external to the estimating
team, or is the estimate just a summation of take-off quantities extended by pricing unit rates?
Accuracy of take-offs and extensionsHas an audit been performed?

Perform risk analysis and develop mitigation strategies

Success metrics are assumption-basedno matter how carefully
or thoughtfully developed. Measures of cost or time performance
and success are based on criteria that have been created for the
project. These criteria assume that certain things are correct, that
certain things will happen and/or that certain things will not happen. For instance, we assume that certain benchmarks or historical productivity rates are repeatable, or even correct, or that key
vendors will comply with our delivery requirements, or even
remain in business, or that labor unrest will not occur.
Risk is in the possibility that reality will trump reasonable
expectations and leave us unprepared for the impacts not budgeted. A risk management process will:

Identify risks and threats,

Assess the probability of occurrence,
Gauge the severity of impact should they occur,
Estimate the cost of mitigation, avoidance, transfer or elimination.

Ensure inclusion of appropriate contingencies, reserves and

allowancesThe costs of mitigation, avoidance, transfer or elimination can be incorporated into the estimate. Risks whose impact
cannot be quantified can be included as part of a rational basis for
contingency development. Contingency is established to mitigate
or eliminate the adverse impacts of the unforeseen or under-predicted events.
Allowances are not risk-based. They provide funding for project elements and events that are anticipated and within the scope
of the project, but cannot be quantified as the project or design
development is in its early stages and will continue to evolve.
Management reserve funds are common to project management. These funds are usually typified as discretionary funds that
Review and validate the basis of estimate (BOE);
Perform risk analysis, develop mitigation strategies and create may be applied by the appropriate level of management for any
purposes that they choose.
appropriate contingencies, reserves and allowances;
Perform value management reviewsinitial and at appropriSetting contingenciesconsiderationsCare must be exercised
ate project stages.
when setting contingencies for risks.
Review and validate the basis of estimate (BOE)There are It is important that contingencies be sufficient to cover the extent
many possible errors in preparing an estimate that can understate and probable impacts of risk. It is equally important that continor overstate the capital or resource requirements for the project. gency does not exceed needs. Over budgeting of contingency has
Some actions and steps to either ensure greater accuracy or to two undesirable effects:
detect errors include:
The company is deprived of funds that might be better used
in other ways or for other projects;
Scope reviewall present and accounted for?
CSC.11.5

2005 AACE International Transactions

Unspent contingency monies will find their way to funding

scope changes, enhancements, and other elements that
should properly be purchased with allowance or reserve
resources.

Increased benefits from project components or processes;

Removal of unnecessary features, functions and costs;
Without compromise of project scope and benefits;
With full ttakeholder backing and ownership of solutions.

Risk changes with time and completion progress. The available

contingency should reflect these changes by readjustments Point 2: Manage Production and Productivity
Project execution costs will be affected by variances or gaps in
through periodic reassessment and quantification of risk.
production goals as well as by productivity assumptions in the performance of the project tasks.
Shortfalls in accomplishing the planned units of work per
Initiate and Incorporate the Value Management Process
unit of time will either delay the project incurring additional costs
Optimizing the value received relative to the investment associated with such extension of time or necessitate the addition
madeThe primary goal of the value management (VM) process of resources with the added costs associated with acceleration.
Productivity variances will require greater-than-budgeted
is in optimizing value, not cutting costs! Optimizing value implies
the achievement of greater benefit per unit of cost, not just a lower units of input per unit of output and will either require additional
total estimate cost. While costs can be reduced through the VM time to complete, i.e. prolong the schedule or will necessitate
process, it is really as a result of identifying and removing features additional resources with the added costs associated with such.
The crux of managing production and productivity is in havor functions whose cost is greater than the benefit they provide or
as a result of substituting features or functions having equivalent ing the capability to identify variances early enough so as to allow
value but lower cost. Conversely, a VM implementation might corrective action. Note the operative words are identify and early
result in an increase in the project estimate if added features con- and apply to both production and productivity!
Although most projects have established methodologies for
vey a benefit greater than their cost.
One risk that must be managed during the VM process is the planning, measuring and analyzing productionfew projects
temptation to eliminate or reduce scope for the simple sake of have any established process for measuring and analyzing proreducing costs. This can result in cost reductions but may not be ductivity. Both processes are necessary for effective project, and
cost savings, particularly if compromising the scope reduces cost, management and control.
desired features or functions of the projector if life-cycle costs,
or total cost, increase irrespective of a one-time, front-end reduc- The earned value solutionEarned Value analysis is one
methodology that enables the simultaneous analysis of production
tion.
Another risk is the assumption by many that greater quality and productivity. It also provides an immediate assessment of premeans increased value. This is not truequality greater than dicted outcomes at completion, early warning, while displaying in
one view a three-way comparison between what was planned,
quality required does not equal greater value, only greater cost.
The first step in implementing a VM process is the develop- what was achieved and how efficiently. The definition of earned
ment of a project value hierarchy. This will clearly prioritize ben- is simple: when a task or portion of a task is accomplished, the
efits, establish rules of engagement and define the tie-breaker to resources , cost or time, are earned. Earned equals budget times
be relied upon when considering trade-off, trade-up and trade- percent complete, and earned' is independent of expenditure.
Earned value is the analytical technique that measures results reldown options.
ative to effort and allows us to manage cost and time on the basis
of performance. The ability to view schedule/budget/cost simultaneously and to immediately detect variances provides us with the
Successful implementation of the VM process requires:
capability to trend or predict outcomes at completion and to
receive early warnings that enable actions in time to make a dif A project value hierarchy;
Early engagement of the processwhen the cost of change is ference. I do not feel that projects can be successfully executed
without the use of the earned value methodology. The irony is
lowest, therefore optimizing the cost to benefit ratio;
Participation by the all project stakeholdersso that benefit, that it is resisted by many because it is thought to be overly analytical, complex, difficult to use and requiring significant investvalue and total cost considerations can be fully vetted;
ments in resources. In fact it requires no additional information
Consideration of total cost;
Distinction between cost transfers or deferrals and cost sav- than is already generated on most projects and requires very little
additional effort.
ings;
Real estimates of costs and benefit;
Steps for the successful implementation of earned value:
Review of processes as well as product;
Focus on valuenot cost;
Develop performance standards, basis of estimate;
Support and acceptance of conclusions by team.
Develop work breakdown structure (WBS);
Allocate cost/time budgets to appropriate WBS level;
With following outcomes to be expected:
Collect actual expenditurescost, time, other;
Measure accomplishment, percent or units;
Optimized value relative to investment;
CSC.11.6

2005 AACE International Transactions

Measure/compare performanceActual versus planned ver- Proposed change review processreview against scope, category cause/reason, benefit/cost analysis from total cost persus earned;
spective;
Keep it simple and make it easy to use! Measure percent complete or work accomplished at the task level, but estimate, Gatekeeper processyes/no, appropriate approval;
Scope control equals expectation management;
allocate and collect costs at a higher WBS level!
Identified funding source;
Funding/impact adjustments;
Learn to say nowhenever appropriate.
Point 3: Manage Scope and Control Change
Change, scope creep, modifications, revisionsdreaded
words and certain budget breakers on any project! Unfortunately,
we can't run from it, we can't ignore it, and we most certainly
ost is the universal and most highly visible performcan't preventbut we can manage it!
ance metric for indicating project success. Cost is
The first step in managing change is to understand why it
also the most competed for corporate resource. Cost
happens. The notion of change being intrinsically bad is an incoris considered as a finite resource. As such, we as projrect one. Events that are external to the project such as evolving ect management and project controls professionals must be willtechnology, changing business models, swings in world market ing to expend the effort and intelligence necessary to properly
conditions, may necessitate the seizing of opportunities with manage it.
which to reconfigure, readapt or enhance the project. Remember
Often mistaken for or confused with cost management, cost
the concepts of total cost and benefit and that it's not just about accounting differs greatly. Cost accounting provides a record and
the project's capital budget.
history of expenditures but does not by itself manage and control
Our challenge is to manage change by identifying and classi- final cost at completion outcomes. While providing a necessary
fying proposed change by driver or root cause and to demonstrate and beneficial function, it is best used as a platform for effecting a
the added cost and/or benefit in adopting the change. There are cost management process.
some change issues that are simply beyond the purview of project
Cost management should be regarded as a process requiring
team to accept or reject. In these instances our obligation is to the integration of separate discipline methodologies and the
ensure what we do the following:
involvement of many persons who are both part of and external to
the project team.
Validate changeverifying that it is not already within scope
Meaningful cost management requires thinking and acting
or range of project expectations;
outside the project. This implies that cost and benefits be consid Ensure the change is needed or is beneficial;
ered in total and not limited to a project's capital budget, that
Is obtained or implemented at the right price, in the right organizational requirements be considered, and that the sometime, in the easiest way;
times competing goals between projects and corporate entities be
Is documented and we can demonstrate its driver, its benefit, optimized and aligned.
and its cost;
Effective cost management requires the implementation of
Has been reviewed and approved by appropriate levels;
methodologies and steps that are repeatable from project to proj Has an identified and approved funding source from contin- ect and can be integrated with organization goals.
gency, management reserve, budget transfers or offsets, etc.

Proposed or requested changes can be categorized into three

types: got to haves, Should haves, or Want to haves. Category
three can become category two through value analysisor even
category 1 via organizational politics, but in many instances these
are requests for extra and additional features that might benefit
one or even several users but do not contribute value to the project or its deliverables. Change management now evolves into
expectation management. As project management professionals
we are wired to say yes, we are after all the can-do-profession. We
must, however, be successful in three areas of expectations.
Establishing expectations and delivering expectations are process
based and can be performed with developed methodologies.
Managing expectations is much more difficult, often requiring us
to act contrary to our nature, and is a personal skill not easily
learned!
Steps for successful change management:

Set and communicate expectationsdetailed scope document distributed to all stakeholders;

CSC.11.7

Mr. Robert L. Tichacek

Saybrook Associates, Inc.
12 Industrial Park Road
PO Box 21
Centerbrook, CT 06409
E-mail: rtichacek@saybrook-associates.com